Second Stimulus Needed to Avoid Lost Decade: Krugman

CNBC.com

Monday, 10 Aug 2009 | 2:42 AM ETCNBC.com

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Recovery sign

The world economy needs a second stimulus if it is to avoid the fate of Japan in the 1990s when the country was stuck with years of sluggish growth, Nobel laureate and professor of economics Paul Krugman told CNBC Monday.

"The good news is that it does not look like the 2nd great depression. For a few months it did," Krugman said.

All indicators now point to the fact that the plunge has stopped, as jobs in the US are lost at a smaller pace and manufacturing and services seem to be stabilizing worldwide, he added.

But the sources of future growth are hard to pinpoint as the financial crisis has left the world with excess capacity and the possibility of high unemployment everywhere, according to Krugman.

More Stimulus & Investment Drivers Needed

More stimulus measures and drivers for investment are needed to jolt the recovery process for the economy, says Paul Krugman, nobel laureate and professor of economics at Princeton University. He assesses the likelihood of an economic recovery with CNBC's Martin Soong.

"Right now I think the world as a whole kind of looks like Japan in the early 90s. Not a catastrophe, but we really don't know how we get serious growth going," he said. "Actually the slump globally has been much worse than anything Japan had during that lost decade."

More stimulus money is key for a sustainable recovery as fears of inflation are overdone, Krugman told CNBC.

"We really should have a second stimulus, we should have more stuff," he said, dismissing fears of price rises as a result of too much cash in the system.

"I think that's an old line from the great depression, that crying 'fire, fire' amid Noah's flood. I mean, we have no signs of inflation on the horizon. There is nothing in there that would be inflationary."

"You have to understand that putting money in the system, it mostly just sits there. It's quite easy to pull it out again if inflation starts to loom," he said.

However, the risk of a second round of the crisis in the medium run is high as a real revamp of the financial system has not happened, according to Krugman.

"At this point the prospects for major overhaul seem to be receding…because of the opposition in congress, because the industry - banks are profitable again, they want everybody to just go away," he said.

"The political will may not be there to do this. And that means that we may well be prepared for another round, another crisis some years down the pipe before we're actually prepared to change things," Krugman warned.